Irish commercial property returns +25.9% in year to September

Irish commercial property returns were at +25.9% in the 12 months to September 2015.

The JLL Irish Property Index continued to perform strongly, with Overall Returns of +7.7% in the quarter. Overall Returns in the last 12 months total +25.9%. This is the 16th consecutive quarter of positive growth.

Capital values rose by +6.1% in the quarter and +18.1% in the year. This was driven by growth across all three sectors, with retail (+8.6%) recording the strongest increase in the quarter, followed by industrial (+5.5%) and offices (+4.6%). Overall capital values have increased by 46.2% since the bottom of the market, but remain -47.7% lower than the peak in 2007.

Overall income rose for the first time in four quarters, with 0.8% growth in the last 3 months. Despite this increase, Income across the portfolio remains 4.7% lower than Q3 2014.

Overall rental values increased by +2.7% in the last 3 months. Industrial had the greatest increase (+3.8%) followed by offices (+3.2%) and retail (+1.7%). Overall rental values are now 16.7% higher than the same point last year.

Hannah Dwyer commented: “The Index continues to perform steadily with strong Overall Returns. This continues to be driven by increases in Capital Values, with growth across all sectors. Overall Capital Value increased by 18.1% in Q3 2015, which compares to 31.7% in Q3 2014. Although this is still strong growth, the pace of this increase is starting to stabilise.”

Peter Hobbs, head of Real Estate Research at MSCI, the index firm, commented last July: "Historically, the majority of global real estate returns have come from income, which has made up more than 80% of the total return over the past decade. In 2014, however, growth in asset values represented 43% of the total return — more than double its long-term average contribution. This trend was driven largely by the weight of capital flowing to real estate and by yield compression. All the same, as of December 2014, income return remains above 5%, despite having fallen in each of the last four years, and is significantly higher than the yields available for global equities and bonds.

For many institutional investors, high pricing is a concern across markets, and this represents a growing risk for real estate investors. At a global level, recent income yields and spreads with bond yields point to real estate being more aggressively priced than at any time since just before the global financial crisis. The difference this time is the persistence of wide spreads due to unusually low interest rates.

A critical question is how real estate yields will respond if and when interest rates start to rise. This response will depend on a complex set of factors including the level and speed of rate increases and the reasons behind them, combined with the performance of real estate fundamentals. The difficulty of gauging current pricing and prospects for real estate markets represents a major challenge for investors and portfolio managers."